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Debt after a death is a topic often surrounded by a cloud of fog where many misconceptions can lurk. Does the loan get cancelled and not have to be paid back? Perhaps the debt has to be repaid straight away? To dispel the myth; a loan does have to be paid back in the event of a death, it doesn’t just go away.

There is currently a large, high profile dispute regarding loans and debt between the family who founded WH Smith which has been on-going since 2014. The quarrel is between the heir to the WH Smith fortune, Henry Smith (otherwise known as the 5th Viscount Hambledon) and his step-mother, Viscountess Lesley Hambledon, over debts owed to the estate.

From a legal point of view, any debts owed to the estate are considered an asset that the beneficiaries, such as Henry Smith, are entitled to. Mr Smith is also joined in his pursuit of repayment alongside a number of trustees of his father’s estate. The 5th Viscount is claiming £150,000 plus interest, and the rest of the trustees are claiming £1.73 million plus interest.

There was an apparent agreement according to Henry Smith a month before his father’s death, where the step-mother would sell a property they had in California and use the proceeds to repay the debt. The property was indeed sold in 2013 (for £1.8 million) and there was an out-of-court settlement but all the money has not been given back, hence the dispute.

How Should a Loan be Handled in a Will?

There are a number of options in regards to how a loan can be handled in a will. The first one to note is that the debt owed to the testator (the person making the will) can be waived. It’s commonplace for parents to loan large chunks of money to their children to help towards, for example, a house deposit. These could be repayable upon death unless they are legally tidied up; i.e. the terms are documented, waived in the will or a deed of release is drawn up.

As debts owing to the deceased are considered an asset that are included in the value of an estate, they subsequently have inheritance tax (IHT) implications. Testators can plan the inheritance of their estate so that they are more efficiently structured. For example, parents might want to waive just part of the loan and accrued interest each year so that the full amount of the debt is not the subject of inheritance tax.

Importance of Legally Correct Record-Keeping

Documenting your decisions is vital. It will always help your estate be administered successfully if there is a written agreement/record of all repayment and interest arrangements, which should be stored with your will. Maintenance of good records will greatly help the executors, who already have a difficult job, to make appropriate enquiries. Executors have a duty to make reasonable enquiries to find the debtor and get repayment. If this fails they can then start to think about formal legal action – as in the Hambledons’ case. It can get very tricky when the debtor and beneficiaries are all in the same family.

Make sure a loan is correctly documented to ensure there is no confusion – this will avoid leaving a mess for your executors to sort out! To get all your documents ship-shape and legally watertight, give our first-class Wills, Trusts and Probate team a call on 0161 930 5151.

If you’re a bit further in and find yourself in a dispute then we also have a dedicated and experienced Wills & Estates Dispute team.